Peak oil review - Nov 19

by Tom Whipple

1. Oil and the Global Economy

A week that began with the markets’ attention focused on the Greek bailout, concerns about the global economy and the US’s fiscal cliff, ended with a major upswing in Middle Eastern violence which some fear could result in constraints on oil exports. For much of the week fears for the economy kept prices edging down, but on Friday as the exchanges of rocket fire and air strikes between Gaza and Israel increased, the markets moved higher with NY oil closing at $86.67 and London at $108.96. Oil prices that have trended down since September are now about $14 a barrel lower as demand for oil slackened and crude supplies remained adequate despite the sanctions on Iran.

US natural gas futures surged to a one-year high on Friday as forecasters are now predicting colder weather across much of the US. The EIA reported an 18 billion cubic foot drawdown of natural gas from storage caverns last week, the first withdrawal of the year. At this time last year, the inventory was still increasing, suggesting that this winter will not be a repeat of the mild 2011-12 heating season.

The European fiscal crisis is on hold for a while. The Greeks managed to borrow €4 billion on the open market to tide themselves over after the EU and IMF delayed the bailout payment that was due last week and continue to bicker over the parameters of the loans. For its part, the Greek government seems to be passing whatever austerity measures it takes to secure the EU loans despite a steady stream of demonstrations outside the parliament building. Last week, the ever-present Greek protestors were joined by a wave of anti-austerity strikes across much of Europe. The euro-zone economy contracted in the third quarter as increasing unemployment and fiscal austerity cut into the demand for oil.

Last week the IEA released its monthly Oil Market Report for November. The report cuts the IEA’s estimate for global oil demand for the fourth quarter by 290,000 b/d due to the US hurricane and persistently weaker demand in Europe. The forecast for global growth in oil consumption has been lowered to 670,000 b/d for 2012 and 830,000 b/d for 2013. Hurricane Sandy is thought to have cut US demand by 230,000 b/d during October.

Non-OPEC oil production in October rebounded by 840,000 b/d as the maintenance season came to a close and weather disruptions ended. OPEC production in October was down by 30,000 b/d to the lowest level in nine months, largely due to disruptions in Nigeria. The Iranians managed to increase production during the month by 70,000 b/d to 2.7 million and to increase exports by 300,000 b/d to 1.3 million. China, South Korea, and Singapore took the increased Iranian shipments.

2. The Middle East

Violence and turmoil in the Middle East increased markedly last week raising concerns about the stability of oil supplies over the longer term. In addition to the on-going Syrian uprising, the week saw a series of riots in Jordan calling for the end of the regime, and a heavy exchange of rockets and air strikes between Israel and Gaza. The new factor this time is better organization and longer range rockets on the part of Hamas in Gaza, and the Arab Spring which has changed the political landscape in the region most notably in the case of Egypt and its attitude towards Gaza.

Whenever Israel in directly involved in hostilities emotion in the area increases several fold. Given Tel Aviv’s overwhelming military superiority in the region, including a large nuclear arsenal, the usually reliable backing of Washington and the major European powers; precarious domestic security situations in Syria, Lebanon, Jordan, and Iraq; and an Iran weakened by sanctions and the imminent demise of the Assad government; it is little wonder that Palestinian frustrations reached the point of futilely firing unguided rockets into Israel. Israel’s assassination of Hamas’ military chief lifted the violence to unusual heights. The Palestinians’ best hope is that the Israeli retaliation will be seen as being so one-sided that Hamas will gain enough sympathy in the outside to bring pressure to force a settlement.

The threat of an oil embargo is one of the few weapons the Arab states have to bring pressure on the Israelis; however, the situation is far more complicated than 40 years ago when the Organization of Arab Petroleum Exporting Countries were able to mount a reasonably successful embargo against Israel and its allies. The political landscape in the region has changed so much in recent years that it is doubtful the Saudis and their Gulf State allies would be able to embargo exports at a time when they need the major importing countries to support them in regional conflicts.

Another possibility is an Egyptian ban on oil shipments through the Suez Canal and the Sumed pipeline. While this currently seems unlikely, prolonged fighting in Gaza could eventually force Cairo to consider stronger measures; however, the peace treaty with Israel is still more important to Cairo than support of Hamas.

The major development in the Syrian uprising last week was the formation of a new anti-Assad coalition that the western powers hope will form the nucleus of a post-Assad government. The coalition has already been recognized by France and other countries are considering offering it various kinds of support. In the meantime the situation inside Syria grows more desperate as winter approaches. Very little economic activity is taking place, and the food and fuel situation is becoming critical for the survival of thousands. The refugee population continues to grow rapidly. Fears that the governments stocks of chemical weapons could fall into jihadist hands are increasing the likelihood that foreign military intervention will eventually become necessary, further complicating the regional situation.

3. The IEA’S Forecast

The International Energy Agency in Paris dropped a bombshell last week when its 2012 World Energy Outlook forecast that US tight (shale) oil production would continue to grow more rapidly than expected for the rest of the decade. This would lead to the US becoming the world’s largest oil producer by 2012 and largely energy independent (though not for oil) by 2035. Given the reduction in demand because of all those fuel efficient cars and natural gas trucks that will be running around 20 years from now, North America (includes Canada) may even be net exporting oil in the 2030s.

The world’s press immediately jumped on this “good news,” with nearly every major publication trumpeting the story that the energy crisis was now way off in the future and that all would be well for the next 20 years. Those few writers that did consult people in the peak oil community buried their skeptical comments at the bottom of their stories. The issue, of course, is just how much longer tight oil production will continue to grow at the spectacular rates we have seen in recent years before it too peaks and starts an inevitable decline. Oil production from the Bakken Shale in North Dakota is currently about 660,000 b/d and production from Eagle Ford fields in Texas is about 600,000 and growing.

There is talk that the two fields will produce 2 million b/d in the next year or so. The IEA seems to be saying that tight oil production in the US will continue to grow and peak at about 5 million b/d circa 2020.

Most people in the peak oil community who have looked into the issue have major problems with these forecasts, believing that a peak in tight oil production somewhere around 3 million b/d is more realistic. Remember that demand is currently increasing at about 750,000 b/d each year so that eight years from now an additional 6 million b/d of new production will be required worldwide plus the 3 or 4 million b/d that will be needed each year to replace the depletion from existing fields.

The first problem with the IEA’s estimate is the rapid depletion of fracked oil wells. Despite limited experience with this relatively new technology, some are calculating that production from many of these wells is dropping by over 40 percent or more a year. We do know that the average daily production from North Dakota’s 4630 producing wells is currently 143 b/d. If we assume that the Bakken oil fields are to produce 2.5 million b/d by the end of the decade then it will need some 18,000 wells each producing the average of 140 b/d. While this is a not an inconceivable number, when one takes into account that most if not all of these wells will have be redrilled twice in the next 8 years the number becomes improbable. We shall have to drill more and more wells just to maintain the same level of production.

Another caveat to the optimism over tight oil is the very high cost of the horizontal drilling and fracking of these wells which may run three or four times that of a conventional well. Some people put the cost of producing a barrel of oil from the Bakken at $80-90, which is just about where oil is currently selling in the region. Should the global economy continue to contract, the selling price of fracked oil could well fall below the cost of production, bringing a marked slowdown to further drilling.

There are so many variables in all this, such as the course of the Middle East, that making estimates of production levels 10 or 15 years from now is fraught with so much uncertainty as to not be of much value.

Quote of the week

"We'd all like to believe in the promise of energy abundance, but the global patterns of consumption and production are a reminder that the Hummers need to stay on history's junk heap.” - Loren Steffy, Houston Chronicle Business Columnist

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

BP announced that it would pay $4.5 billion in fines and other payments to the US government and plead guilty to 14 criminal charges connected to the 2010 accident which resulted nearly 5 million barrels of crude being spilled into the Gulf—as well as the deaths of 11 crewmen.(11/15, #20)

Iran has postponed until 2014 the planned start-up of a research reactor which Western experts say could potentially offer the Islamic Republic a second route to produce material for a nuclear bomb. (11/17, #10)

Iran is ready to double the output at its underground uranium enrichment facility, the UN nuclear watchdog says. A leaked report by the International Atomic Energy Agency (IAEA) said there were 2,784 centrifuges at Fordo, and that Iran could soon double the number operating from 700 to 1,400. (11/17, #12)

With flooding, theft and corruption plaguing the country's oil sector, the Nigerian government said the estimated oil reserves were on the decline. The EIA had reported recently that crude oil deliveries from Nigeria for July were down about 500,000 barrels compared to the same month last year. (11/17, #14)

Royal Dutch Shell has lifted its force majeure on gas supplies to Nigeria Liquefied Natural Gas. The force majeure was put in place in early October because of a fire caused by oil theft on the Bomu-Bonny trunkline. A force majeure on Shell's exports of Bonny Light and Forcados crude oil, declared later in October, remains in place. (11/16, #9)

The EPA said it is moving forward with a mandate for corn ethanol in gasoline, denying requests to waive the requirement following a drought that pushed up corn prices. (11/17, #16)

The Long Island Power Authority is facing more than $800 million in Sandy damages, according to an executive at the utility. It is unclear how the embattled electric company—which serves 1.1 million customers in the New York City region—will pay the bill. (11/17, #18)

Two people are missing after an explosion and fire at a Gulf of Mexico platform owned by Black Elk Energy Offshore Operations LLC. Twenty-six people worked on the platform, which was not producing oil or natural gas at the time. Eleven injured workers were flown to area hospitals. (11/17, #19, #20)

Ukraine's state-owned natural gas company aims to cut the amount of natural gas it buys from Russian suppliers next year. European leaders aim to break Russia's grip on the regional energy sector by securing natural gas from Caspian suppliers like Azerbaijan. (11/17, #24)

Drilling credits and other tax incentives face a risk of being terminated by US Congress to solve the pending U.S. fiscal cliff, said industry officials at a Deloitte Oil and Gas Conference in Houston. The loss of the tax treatments as a way to bridge the financial gap would likely occur as part of a deal to broaden the tax base and lower the corporate tax rate. (11/14, #17) (11/16, #13)

The state of Virginia is trying to restore a lease sale for energy exploration that was canceled in 2010 after the BP oil spill. Its efforts have made Virginia the new epicenter of a campaign by energy companies to gain a toehold in the Atlantic. (11/15, #19)

The director of the Norwegian Petroleum Directorate said it "might be a challenge" to meet production targets for the year. He blamed much of the decline on regular maintenance and "technical problems" at several offshore fields. (11/15, #23)

A series of oil refinery outages in Venezuela in recent months is "further denting the country's product supplies and raising gasoline import requirements," the International Energy Agency said. (11/14, #10)

China consumed 399.8 billion kWh of electricity in October, up 6.1% year on year, according to figures released by the National Energy Administration. (11/14, #11)

General Electric reached a deal to sell equipment to Clean Energy Fuels Corp which is building a series of liquefied natural gas fueling stations for U.S. truckers. The company sees liquefied natural gas equipment as becoming a $1 billion market over the next five years. (11/14, #20)

The Iraqi government said it considered unilateral deals between Russian energy company Gazprom and the Kurdish government to be illegal. Gazprom in August acquired a stake in two oil blocks in the Kurdish provinces of Iraq. The Russia deal followed similar moves by France’s Total and Exxon Mobil. (11/13, #13)

Iceland has signed on with the World Bank to play a role in a major geothermal energy project in East Africa, its foreign affairs minister says. The geothermal development plan long East Africa's 3,700-mile Great Rift Valley would cover 13 energy-poor nations. (11/12, #17)

The US drilling rig count gained 3 units during the week ended Nov. 16, with the total number of rotary rigs reaching 1,809. This compares with 2,001 rigs working in the comparable week last year. (11/17, #22)